he macroeconomic policy mix adopted by the US under President Reagan was one of fiscal expansion without monetary accommodation; and this was associated with an extraordinary rise in the dollar. By the mid-1980s, the indicators of economic performance may have suggested reasonable US 'internal balance,' with unemployment falling to around 7 per cent and inflation about 3 per cent. But they also showed a balance of payments deficit of about 3 per cent of GNP; and that implied a rundown of the US net external asset position. To the embarrassment of those 'supply-siders' who had predicted that the tax cuts would 'finance themselves' (via their economic stimulus to output and so tax revenues), there was in addition a large rise in the Federal budget deficit. The orthodox solution to this 'problem of the twin deficits' is, in principle, straightforward a devaluation of the dollar combined with fiscal contraction. The fall of the dollar is designed to price the US back into world markets and restore external balance; while the fiscal contraction is intended to prevent the switching of demand towards the US from upsetting the 'internal balance,' i.e. the non-inflationary full employment already attained. In practice, of course, there are substantial practical problems. For one, how to estimate an equilibrium value for the dollar after such a prolonged and pronounced misalignment which has doubtless induced 'structural' shifts in the US trading sector. For another, how to implement the substantial contractionary shift in fiscal policy required to secure the switch of resources without provoking inflation. The first half of this orthodox prescription (or at least a good deal of it) was achieved with relative ease. The remarka-